Market Summary:

Last week, there was generally increase over the market. SSE Composite Index (000001.SH) changed 0.84 % to 2514.87. Specifically, small cap shares perform better than large cap shares and we can observe that CSI599 did better than SSE50 (1.03% vs 0.94%).

As for the overall market valuations, they remain at low level in a longer historical view.

As for Credit spread between A-rate corporate bonds, the 5Y spread slightly fluctuation and matchs to 10Y spread. As for the spread between Shibor Rates and Treasury bonds yield, short-term (1M) spread experienced obvious decrease. As for treasury bond yield, last week, short-term yields short term yield of treasury bond decreased. Furthermore, as for long-term yield, there is a small downward move.

As for exchange rate, there were some appreciation for both inland and offshore rates, that CNY/USD changed -0.26% (up to 16:30 of last Friday) and CNH/USD changed -0.42%.

As for foreign fund flows via both Shanghai and Shenzhen-Hong Kong Stock Connect, last week there were both net inflows for Shanghai and Shenzhen markets. The net inflow over last week was 4.13 billion CNY and the cumulative net inflow was 643.10 billion CNY at last Friday. Specifically, more fund flow in shanghai market than Shenzhen market.

In sum, the experienced some rebound, with the Friday’s news, that the central bank cut the reserve ratio, the sentiment may be boosted and rebound may kept for a short time. However, as the downward pressure of economy we mentioned last week, the market may only rebound at a limited level. We have a more detail discussion about the reserve ratio reduction in the macro economic discussion part of the report.

News:

(1). Central Bank: In order to further support the development of real economy, optimize the liquidity structure and reduce financing costs, it decided to reduce the deposit reserve ratio of financial institutions by 1 percentage point, including 0.5 percentage points on January 15 and January 25, respectively. Meanwhile, MLF expiring in the first quarter of 2019 will not be renewed. In a reasonable range, the central bank will continue to implement a sound monetary policy, maintain moderate tightness, not flooding, pay attention to directional regulation and control, maintain reasonable and abundant liquidity, maintain reasonable growth of monetary credit and social financing scale, stabilize macro-leverage ratio, take into account internal and external balance, and create a suitable monetary and financial environment for high-quality development and supply-side structural reform.

The reduction will release about 1.5 trillion yuan of funds, together with the funds released by the forthcoming dynamic assessment of directional medium-term lending facilitation operation and inclusive financial directional reduction, and after considering the factors that the medium-term lending facilitation expired in the first quarter of this year will not be renewed, the net release of long-term funds will be about 800 billion yuan; the reduction is still directional regulation, not flooding, and sound monetary policy.

(2) Shanghai Securities Journal: Sheng Songcheng, Central Bank Counselor: The RMB exchange rate will not break the "7" under normal circumstances this year, and there is still the possibility of appreciation in general.

(3) Pan Gongsheng, deputy governor of the Central Bank, went to the China Association of Interbank Market Traders to conduct an investigation and held a symposium on further developing the financing function of the bond market, innovating bond market products, supporting the development of the real economy, improving the opening level of the bond market, expanding the depth and breadth of the bond market, improving the bond market system and strengthening market supervision.

(4) China Securities Journal: All-round reduction! There is still much room for this year. Experts believe that this reduction is an important measure for steady growth, not "flooding". The two-time implementation is in line with the rhythm of cash investment before the Spring Festival, which helps to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. In 2019, there is still a possibility of a reduction in reserve ratio for each quarter, with about 200 basis points for the whole year.

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